Will stagflation cause the dollar to crash and be a bottomless pit when the next recession hits? That is what Peter Schiff is predicting. We look at where he is right and where he seems to be off the mark when it comes to the U.S. economy and a dollar collapse.
In this episode you’ll learn:
- Is an economic recession overdue?
- Why running ongoing trade deficits leads to higher private sector debt balances.
- Why interest rates and savings is not too low.
- Why the U.S. inflation rate has been so low.
- What would have to happen for the dollar to collapse.
Show Notes
Joe Rogan Experience Episode 1145 with Peter Schiff
Total credit to households as a percent of GDP – Bank of International Settlements
U.S. Bank Deposits to GDP – Federal Reserve Bank of St. Louis
Americans have been saving more than was thought – Financial Times
Commercial and Industrial Loans – Federal Reserve Bank of St. Louis
Episode Sponsors
Episode Summary
In this episode of Money For the Rest of Us, David considers the question proposed by Peter Schiff on Joe Rogan’s recent podcast episode, “Is a dollar collapse coming?” Schiff is an economist, financial broker, and author who specialized in financial topics. On Rogan’s podcast, he explained why he believed an economic recession coupled with a destroyed currency is about to hit the United States. David examines his argument point by point and outlines why he does not believe an imminent dollar collapse is something US investors need to worry about. For all the details on this complex subject, be sure to listen to this podcast episode.
Economic expansions don’t die simply because of old age
The first prediction that Schiff makes on the podcast is that by the end of President Trump’s first term, the US economy will fall into a “severe recession” and the dollar will become “a bottomless pit.” If this were to happen, people across the country will want to get out of the dollar and invest in other currencies. However, David explains that economic growth and expansion doesn’t simply cease because of the length of the prosperity. An analysis by the Federal Reserve Bank of San Francisco showed that the odds of a recession in any given year are 23%, with a 77% probability that growth will continue. Just because an expansion continues for another year does not increase the probability of a decline in the following year.
If a dollar collapse is coming, it will do so relative to other currencies
There’s a key idea that must be understood when examining economic declines. If the US dollar is to collapse, then it will do so relative to other currencies. David explains that other currencies have to strengthen while the US dollar weakens, meaning other countries need to be in a better position than the US (in areas such as GDP, inflation and private sector debt.) This isn’t the case in 2018. The US currently sits at 152% of non-financial private sector debt to GDP. Globally, the figure is 154%. Europe is currently at 160%, the UK at 170%, and China at 208%. Since many other countries are as indebted or even more indebted than the US, there isn’t a large draw for people to flee the USD.
The relationship between money supply and inflation is essential to understand
A major theme to the Schiff podcast interview is the world is going to fall apart, so be prepared. His biggest worry is the Federal Reserve’s quantitative easing program will lead to stagflation, a period of high inflation that occurs during a recession.
Schiff says, “Inflation is the expansion of the money supply. You can’t expand prices. Prices can go up and they can go down. They can’t expand. What expands is the supply of money. The supply of money expanded… so inflation caused stock and real estate prices to go up. All sorts of things went up because of inflation. Ultimately, a lot of that inflation is going to end up at the supermarket. So you’re going to have that at the same time we have the recession.”
David explains further by saying that the money supply as measured by M2 did increase. M2 measures cash, traveler’s checks, and checking and savings deposits. M2 increased from $1.6 trillion in March 2009 to $3.7 trillion in April 2018. The money supply increased because bank loans increased significantly. Banks create most of the money supply through their lending activity. Yet, despite the increase in the money supply, the inflation rate has been low. For inflation to pick up, an economy needs both an increasing money supply and capacity constraints in terms of the ability of a country to produce goods and services. Schiff says that the unemployment rate in the U.S. is understated which suggests there is workforce slack, a condition that is disinflationary, not inflationary.
This is why a dollar collapse and economic ruin aren’t on the immediate horizon
Given all the information Schiff outlines in the podcast, David does not believe a dollar collapse is on the immediate horizon. This is because he simply does not see many other countries in stronger economic positions. Investors won’t flee from the USD if there aren’t much better options available. While an economic recession is always in the cards for the future, it is currently not an immediate “gloom and doom” situation. To hear the rest of David’s reasoning behind why the USD is safe for the time being, be sure to give this episode your full attention.
Episode Chronology
[0:33] Is a dollar collapse imminent?[3:07] Economic expansions don’t die of old age
[5:22] How tariffs and imports impact the US economy
[10:44] If the dollar has to crash, it does so relative to other currencies
[14:01] The relationship between the Federal Reserve and interest rates
[19:11] Bank deposits, savings, loans, and interest rates all contribute to the US economy today
[24:29] The relationship between money supply and inflation is essential to understand
[33:08] Why David doesn’t believe a dollar crash and economic ruin are on the horizon
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Why Is the U.S. Dollar So Strong? Will It Continue?
Transcript
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